April 24, 2014

David Novak is the chief executive of Yum! Brands, the parent company that runs Pizza Hut, Taco Bell and KFC. Last year, while Yum! Brands and other restaurant companies lobbied against raising the minimum wage, Novak made at least $22 million—more than 1,000 times what the average fast-food worker makes in a year. In return for paying him so much, Yum! got a tax break.

The National Restaurant Association, which represents Yum! and other restaurant companies, is expected to launch a lobbying blitz in Washington next week against a minimum wage increase. For years the restaurant industry has fought to keep the wage floor low, all while rewarding its CEOs with increasingly large pay packages. As a result, the food industry is now the most unequal sector in the American economy. Thanks to a tax loophole that encourages companies to raise “performance pay” for executives, taxpayers are effectively subsidizing the imbalance.

While inequality between low-level workers and CEOs manifests in all areas of the economy, a new report from Demos concludes that the gap within the food industry is exceptional. Between 2009 and 2012 the CEO-to-worker pay ratio in food services and accommodation was about twice as large as most other sectors. In 2012, fast-food CEOs earned 1,200 times as much as the average employee.

The CEO to worker compensation ratio in the fast food industry reached 1,200 to 1 in 2012, dwarfing other sectors.(Demos)

Why is the gulf between executive compensation and average earnings colossal in the restaurant industry, in particular? One explanation is stagnation of wages at the bottom, abetted by low minimum wage standards. Fast-food workers are paid less than any other employees in the country, and that low floor has barely moved in a decade. The industry’s average hourly wage of $9.19 puts the salary for a fulltime worker below $19,000—poverty wages if she’s supporting a family of three. Most fast-food jobs aren’t even full-time; the average salary for average hours is under $12,000. Last year, fast-food wages fell to levels not seen since 2006.

Meanwhile, compensation for fast-food executives has more than quadrupled since 2000. Those CEOs pocketed an average $23.8 million in 2013, making them among the highest paid people in America.

From 2000 to 2012, the CEO to worker compensation ratio in the fast food industry grew 470 percent. (Demos)

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A sizable chunk of their compensation comes in the form of stock options and other forms of “performance pay,” which the IRS allows companies to deduct from their taxes. That loophole “serves as a critical subsidy for excessive compensation,” according to a new report from the Institute for Policy Studies. “The larger the executive payout, the less the corporation pays in taxes. And average taxpayers wind up footing the bill.”

In the past two years alone, executives from the twenty largest corporate members of the National Restaurant Association took in more than $662 million in deductible compensation. That cost the government some $232 million, according to IPS—the price of a year’s worth of food stamps for 145,000 households. In the case David Novack, IPS reports that Yum! was able to deduct a combined $23 million from its tax bills in 2012 and 2013 on account of his “performance pay.”

Beyond the obvious hypocrisy of companies who throw millions at their CEOs while saying they can’t afford to pay their workers a living wage, the level of inequality within the food services industry has troubling implications for the whole economy. The jobs created in the wake of the recession have largely been in low-wage industries like food service. In other words, the jobs being added are the most unequal. Economists have pointedoutagain and again that inequality undermines economic growth, and there are more immediate costs as well, like the nearly $7 billion in public assistance that fast-food workers rely on to make up the gap between rock-bottom wages and the cost of living.

According to Demos the pay gap could hurt fast-food companies themselves, with bad publicity affecting their reputation and low wages encouraging poor customer service. “Consumer are increasingly dissatisfied with their experiences at the biggest fast food companies,” the Demos report found. “In addition to operational issues, the low pay practices of fast food employers have opened the companies to expensive legal risks.” A McDonald’s franchise, for example, settled a lawsuit with employees over uncompensated work, wage deductions and other infractions for $500,000 in March, while class-action suits are pending in at least two states over alleged wage theft.